Oil Rockets to New Heights Above $77, Natural Gas Recovers

Soaring past record gains made yesterday, the price of crude oil skyrocketed to more than $77 on the New York Mercantile Exchange Thursday on unexpected news of a steep drop in U.S. gasoline and distillate inventories. Additionally, the price of natural gas recovered by a slight gain from yesterday's close.

Rallying to a high of $77.97 during intra-day trading Thursday, its highest level since October 15, 2008, the price for light, sweet crude oil ultimately settled at $77.58 on the NYMEX.

"I think the Department of Energy's weekly petroleum inventory report helped the market rise initially," said Gene McGillian, analyst for Tradition Energy in Stamford, Connecticut.

"But it looks as if the same factors that have been propelling oil prices through $70, and now through this year's highs, are basically underpinning the rally again," McGillian continued.

"There's the perception that, going forward, the economic recovery will help rekindle energy demand and boost prices higher and higher. You also have the dollar, which has been under assault over the last month or so, continuing to drop. Those two factors together have driven oil prices, and it looks as if they have more room to go [up]," the analyst said.

Gasoline's Big Draw

Today, the U.S. Energy Information Administration released a report showing gasoline inventories down by more than 5 million barrels in the week to October 9, along with a fall in distillate stockpiles.

Most analysts had surmised that both would be high considering bearish market fundamentals; however, the report indicates a significant decline in refinery utilization rates, which is more than likely the primary reason for the draw in product inventories.

"A quick glance at the EIA's report looked as if the drop in gasoline prices helped trigger some of the buying today. But keep in mind that refinery rates dropped more than 4% this past week," McGillian noted.

"The fact is that energy demand levels here in the United State haven't significantly risen yet. A lot of the rally that seems to be occurring is based on perceptions that Far Eastern demand for energy is quite strong. But that by itself is going to have trouble taking the market to a lot higher levels. Until we see signs that some of that economic activity that has been increasing in China, in particular, starts to spread into the United States and Western Europe, the market is going to have tenuous footing where it is now," McGillian contended.

Sustained Heating Demand Needed

Recovering by a slight gain on the NYMEX today, the price of natural gas settled higher at $4.482 per thousand cubic feet, but still below a recent high of more than $5.

With the start of the winter season, seasonal domestic demand could lead to another run up in natural gas prices, but that demand has to be at a sustained level to support a higher price.

"Natural gas is a very seasonal contract oftentimes, and we are approaching our winter heating season, which normally gives a nice boost to gas demand," McGillian explained.

"The fact is today's storage report was a little larger than what the market was looking for, which pushed it down to basically right near this month's lows. But the market turned around, and I think that was in sympathy with the support it got on the other side of the energy complex," the analyst added.

"With storage levels at an all-time record and we're closing in on what the EIA thinks is a capacity level, and until we see a sustained level of heating demand, then natural gas is going to have a lot of trouble continuing to rally -- unless the oil and equities markets continue to act the way they have been over the last few weeks," McGillian concluded.